Bankruptcy Basics

By Stephen J. Zayler, Bankruptcy Attorney

BASIC CONSUMER BANKRUPTCY INFORMATION

The following is a basic outline of Bankruptcy Proceedings. It is intended to set forth general rules of law and procedure that affect the typical Chapter 7 and Chapter 13 Bankruptcy Pro­ceeding. The specific application of these general principles depends upon the particular circumstances of your financial condi­tion and situation.

Purpose:

The purpose of a Bankruptcy Proceeding is to allow a person to obtain what is known as a "fresh start." No one wants to file a bankruptcy or ever expects to have to file; however, the law and society recognize that sometimes people will find themselves in financial situations where it becomes impossible to pay their debts as they come due. Often this is caused by factors totally beyond control, such as unexpected or long unemployment, illness, loss of income, lawsuits, tax problems, and similar problems. Usually a person faces a combi­nation of these problems. Bankruptcy offers a person a legal and proper way to become discharged or released from having to pay some or all of their debts when there is no possible way to pay them.

The reason the law allows a person to become re­leased from certain debts is the recognition that it is in the best interest of all for a person to remain a productive member of society by having a second chance.

Bankruptcy Law Changes :

It is very important to understand that for cases filed after October 17, 2005, the Bankruptcy Law has been changed. In some important ways, these new laws have made major changes in the way a bankruptcy works. There are still a number of areas where it is very uncertain what some of these changes mean and how they are supposed to work.

Debt Relief Agency:

I am authorized to act as a "debt relief agency" under the new laws to help an "assisted person," which is defined as a person with mostly consumer debts (meaning debts created for personal or family use, not business) whose net equity value (discussed below) is less than $150,000.00. Most people without specific business related debts will be considered an "assisted person." Certain additional information required by law will be provided to you.

Mandatory Debt Counseling - Before and After You File:

The law requires that all persons wanting to file a bankruptcy must seek credit counseling with an approved debt counseling service before you file. This is called a credit counseling course and may be done in person, over the telephone, or through the internet. I will provide you a list of approved counseling agencies. There are very limited emergency exceptions.

After you file there are requirements for a mandatory financial education course that must be taken to complete your bankruptcy. If this certificate is not filed with the Bankruptcy Court within the established deadline, your case will be closed without a discharge being issued. There will be a fee charged by the Court of $260.00 to reopen the case and file the certificate so that you can receive your Discharge Order. If you complete this course online and the agency indicates to you that the certificate will be e-mailed or faxed to my office, I strongly urge you to contact my office to make sure that I do in fact receive the certificate. I have no way of knowing to expect the certificate unless you inform me once you have completed the course.

Full Disclosure of Information - and I mean everything!

Bankruptcy starts with full and complete Disclosure of your finances. You must tell the Court under penalty of perjury, everything you own and everybody you owe money, including the debts you want to keep and pay. This is done by filling out the following forms:

The Schedules

Schedule A is a list of all real estate (land and houses) including oil and gas and mineral interests in which you have any ownership interest, individually, jointly, or otherwise, whether located in Texas or anywhere else, purchased, received as a gift or inherited, paid for or not.

Schedule B is a list of all personal property owned (everything other than land) by you, which includes any kind of property or asset, property right, or claim, or right to property which you own, paid for or not.

Schedule C is the list of property which you claim as ex­empt or protected. There are two ways to protect property which we will discuss in more detail later.

Creditors - There are three main types of creditors:

Schedule D is a list of all creditors whose debts are se­cured or guaranteed by some type of property as collateral, whether real estate or personal property. The treatment of secured creditors in bankruptcy is very important. Secured creditors are given special rights to protect their mortgage rights in the collateral, and so each secured claim must be dealt with very specifically. Generally speaking, if you wish to keep property which acts as security or col­lateral for the debt, you must pay that secured debt in full. Most secured debts are known as purchase money secured debts, which means that the debt is for the purpose of financing the purchase of the specific property. Sometimes a loan is made for one purpose and property which is not encumbered by a debt is placed up as collateral. These are known as non‑purchase money secured debts, and typically are made with finance companies. It is sometimes possible to void or cancel the lien or mortgage against this property.

Schedule E lists what are known as priority debts. The principal priority debts are taxes and unpaid child support. However, taxes may also be considered secured if a proper tax lien has been filed. Generally speaking, these debts may not be discharged in a bankruptcy.

Schedule F lists all other debts not secured by any piece of property ("ordinary unsecured debts"). This list should include all debts, claims and even possible claims, however unlikely, which do or may exist against you. Examples are credit cards, signature loans and medical bills.

Other Required Information :

Schedule G lists all existing contracts and unexpired leases. Executory contracts and leases are contracts which you have with another person which have not yet been completely performed.

Schedule H lists all co-debtors who are or might be jointly liable with you on a debt.

Schedule I lists average monthly income from all sources.

Schedule J lists average monthly expenses as calculated on the basis of your financial situation after you file bankruptcy. Law Change - Expenses are now required to be set according to the Financial Collection Standards of the Internal Revenue Service.

Statement of Financial Affairs or Background Questions

The Statement of Financial Affairs is a financial disclo­sure form. All answers to the questions in this statement are made under penalty of perjury. The questions ask for infor­mation concerning your financial condition and recent history. For example, questions deal with such matters as income over the last several years, involvement in lawsuits, repossessions and foreclosures, transfers of property, and similar matters. If you have been engaged in business, other than as an employee, addi­tional questions must be answered concerning that business.

While I know the forms we give you may look long and complicated, they really are just long! My office cannot fill out these forms for you. It is important that you fill them out as completely and accurately as possible.

Your Main Rights in a Bankruptcy:

When a bankruptcy is filed, you receive three important protections:

Number One: The Right to be left alone : From the moment that the bankruptcy is filed, the automatic stay of the Bankruptcy Code prevents all creditors from making any at­tempts to collect a debt or exert control over the property of the debtor's bankruptcy estate. Creditors cannot call, write, sue or repossess. Creditors who knowingly violate the automatic stay protection can be held liable for damages.

Law Change: The Automatic Stay protection is not always so automatic and may be limited if you have previously filed a bankruptcy before. We will need to discuss this in more detail if you have previously filed.

Number Two: The Right to keep some property: The second protection is the right to exempt or protect a sufficient amount of property to maintain a household together. Generally speaking, a person's homestead, furniture, personal effects, tools of the trade, retirement/social security benefits and motor vehi­cles may be claimed as exempt. The exemption of other types of property depends upon your particular situation. Any property which you wish to claim as exempt and keep, you must continue to pay for it if it has a debt against it. For example, the debts on home mortgages and debts on automobiles are often reaffirmed and payments continue to be made as if the bankruptcy never occurred. If you are behind some payments, known as " arrearage ," often an agreement may be reached with a creditor to catch up on the payments or a Chapter 13 Reorganization Plan filed to catch up past due payments. Corporation debtors cannot exempt property.

Law Change: While the amount and type of property a person may exempt and protect from creditors is still quite reasonable, there have been some important changes which will affect some people. We will discuss this in more detail if it may cause a problem for you.

The amount of any type of property you may exempt or protect is normally based on how much net equity value you have. For most purposes the formula is: Actual Fair Market Value - secured debt = Net Equity Value.

Fair Market Value in bankruptcy is normally a used retail sales price or the cost to replace an item of property with another, "as is", or in the same condition. Sometimes, Fair Market Value is a liquidation or garage sale price.

Number Three: The Discharge or Release from Certain Debts:

Discharge of Debts

The bankruptcy discharge releases you personally from any further liability from your obligation to pay debts or claims which existed before you filed bankruptcy ("pre‑petition debts"). Debts which arise after the filing of your bankruptcy generally speaking are not affected by your bankruptcy filing. You should list any and all debts which you owe no matter the amount nor to whom it is owed. Failure to list a debt may mean that you remain liable to pay that debt. Corporation debtors do not receive a discharge. Their assets are sold and the money paid to creditors.

Non-dischargeable Debts

You should know that there are some debts that cannot be discharged in a bankruptcy. You will still be liable for these debts even after your discharge. A summary of the most common of these follows:

a. Taxes, in most instances; especially if a tax lien is filed;

b. Liability for obtaining money, property or services under false pretenses or fraud. The most common example in this category where a debtor has failed to list all of his creditors on a loan application at the time of making a loan or purchase.

c. Use of credit cards for purchases or cash advances just before filing bankruptcy: If you have any cash advances or have purchased anything of more than $500 value per creditor in the last ninety days please let me know.

d. Debts not listed in your paperwork unless the creditor had actual knowledge of the bankruptcy proceeding;

e. Fraud, embezzlement, misappropriation in a fiduciary capacity or larceny;

f. Alimony and money due for support and maintenance of a spouse, ex-spouse or child, and is some cases property settlements from a divorce;

g. Willful and malicious injuries;

h. Fines, penalties or forfeitures payable to the government;

i. Educational loans;

j. A judgment arising from driving while intoxicated; and

k. Any debt that could have been scheduled in a prior bankruptcy proceeding.

Some of these debts may be discharged in Chapter 13 but not Chapter 7.

The Bankruptcy Procedure

All bankruptcies in this area are filed in the United States Bankruptcy Court for the Eastern District of Texas located in Beaumont, Texas, or in some cases, Tyler, Texas. Approximately thirty (30) to forty-five (45) days after the date of filing, the 341a first meeting of creditors will be held in Beaumont. Your attendance is required. Casual clothing is permitted. At that time the Trustee appointed by the Court and any interested creditors have an opportunity to ask you a reasonable amount of questions concerning your financial history, condition, location of property and similar matters.

Chapter 7:

In Chapter 7 cases, the Trustee wants to know if you have any type of property above the amount you can exempt, that he can sell and pay the money to your creditors. In 95 out of 100 cases, there is no extra or non-exempt property for the Trustee to sell. In the majority of cases, your bankruptcy is complete after the creditor's meeting.

In Chapter 7 cases, approxi­mately 60 days after that meeting, unless an objection is filed by the Trustee or a creditor, you will obtain an order from the court discharg­ing or releasing you from all dischargeable debts. You will pay any debts you agree to continue to pay and any debts which by law cannot be discharged (like taxes or student loans). Special problems and complaints objecting to the debtor's right to obtain a discharge require additional court appearances.

Chapter 13:

If you have debts that will not be discharged in a Chapter 7 or secured debts you need to catch up or refinance, you may need to consider a repayment plan under Chapter 13.

In a Chapter 13, you pay your creditors back, some or all of their debt, through a repayment plan supervised by the Court and the Chapter 13 Trustee. The amount you pay depends upon your income, living expenses and the amount and type of creditors.

Budget - From total family or household income, you subtract normal deductions for taxes, social security, etc., to get Net or Take-Home Pay. From Net or Take-Home Pay, you subtract necessary living expenses (housing, food, clothing, gas, child care, etc.) to get the Surplus or Trustee Payment.

Expenses: The amount of Allowed Living Expenses is now set by law at the IRS Standards, and neither I, you, nor the Judge can vary from those amounts. However, this is one of those areas which is still somewhat uncertain.

Plan - The Chapter 13 Plan is normally used to pay for debts that do not go away - like taxes- and secured debts where you need to catch up past due payments or refinance payments.

Law Change: The biggest recent changes in Bankruptcy Law affect Chapter 13:

1. Based upon your income, you may be required to file a Chapter 13 repayment plan;

2. You must stay in Chapter 13 and pay creditors for a minimum of three (3) years and a maximum of five (5) years;

3. The ability to refinance cars, trucks and other personal property is more limited;

4. The protection of the automatic stay may be limited;

5. The Plan is approved much faster than under the previous law even before all creditors have had time to file their claims. This means the Plan will have to be amended or changed, perhaps several times, to meet and pay for these later claims.

6. Annual financial statements must be filed though out the length of the Plan.

7. All tax refund received while you are in a Chapter 13 repayment plan must be turned over to the Trustee .

Future credit

Remember - good credit is paying what you owe when it is due...anything else is less than good. The way you handle the repayment of your debts will be considered by a prospective lender in the future. You will have to work to re-establish your credit upon completion of your bankruptcy. THERE IS NO REPRESENTATION OR GUARANTEE THAT YOU WILL BE ABLE TO SECURE CREDIT AFTER FILING OF ANY BANKRUPTCY. It is totally up to a future lender to make this decision. I have an additional handout which discusses this more.

BANKRUPTCY FRAUD

There are some instances in which the Bankruptcy Court will refuse to grant a discharge to a person. The reasons generally are if the debtor:

a. Transferred, removed, destroyed, mutilated or concealed property with intent to hinder, delay or defraud creditors. (Failure to list assets or transfer of assets is an example.)

b. Concealed, destroyed, mutilated or falsified financial information. Destruction of records or failure to keep adequate records. (Failure to account for sums of money or property dissipated before filing is an example.)

c. Made false oaths or claims, bribed or withheld information from the Trustee. (Signing your schedules with incomplete or false information is an example.)

d. Failed to explain a loss or deficiency of assets. (Failure to explain the reason the value of the assets in your bankruptcy petition is different from values listed in prior financial statements is an example.)

e. Refused to obey a lawful order of the Court.

You should be aware that filing false or incomplete information or concealing assets could be viewed as a federal crime punishable by fine and/or imprisonment. The failure to list assets or the disposition of assets can result in the denial of your discharge or provide grounds for the later revocation of your discharge when discovered. Please take your responsibilities seriously. Ask if you have questions. Full and complete disclosure of facts and information is of primary importance in a bankruptcy proceeding.

OTHER IMPORTANT INFORMATION

In order to protect yourself before and after you are granted a discharge in bankruptcy, you must have done or will do the following:

a. Disclose all of your creditors, assets, liabilities, current income, current expenses and financial affairs. Disclose all of your assets, including possible claims, even though the asset may be an exempt or protected asset.

b. Obey all orders of the Bankruptcy Court and comply with all legal and reasonable requests made of you by the Trustee in Bankruptcy.

c. Attend your first meeting of creditors and any other hearing if required.

d. Make certain that you have listed all of your creditors with their correct addresses and zip codes, including creditors such as collection agencies. You should also list anything you might possibly owe or be liable for, no matter how remote. Remember if the obligation is not properly listed, you cannot exercise your rights in bankruptcy as to such unlisted claim.

e. List all pending lawsuits against you, all judgments already taken by a creditor, and all lawsuits which may be filed against you in the future, including those filed either before or after your discharge. I wish to emphasize to you that filing a petition in bankruptcy does not automatically cancel your debts, but it does normally provide you with a successful defense to lawsuits, which defense must be asserted in a civil action. If you are served with a summons and complaint or if any of your property is levied upon by writ or execution, attachment or garnishment, you must act to defend your rights. Therefore, you must obtain help from your attorney immediately. If there were any outstanding suits, judgments, executions or garnishments against you at the time you consulted our office and you have not disclosed this information before this time, do not withhold this information any longer.

f. After your petition in bankruptcy is filed, do not make any new promises, written or oral, to pay creditors. Let this office know of any debts you wish to reaffirm and continue to pay. These must be properly reaffirmed at the Reaffirmation hearing and approved by the Bankruptcy Judge.

MARITAL PROBLEMS

If you and your spouse are experiencing serious problems in your marriage, please let my office know. A divorce filing in the middle of a bankruptcy can cause very serious complications and under the law may require me to withdraw from representing either spouse in the bankruptcy.

Change of Address or Employment

If you should change your residence address or acquire a new telephone number, either at work or at home, please provide this information to this office. As your case progresses, it may be necessary to contact you and make some decisions important to you. If you are uncertain of an address or phone number for any period, please provide us with the name, address, and telephone number of someone who will be able to contact you if it becomes necessary. If you should change employment, please advise this office and the Trustee's office of the new name, address, and telephone number of your new employer or place of business.

Transfers of Property

Once you have met with me for an initial consultation, under no circumstances are you to transfer, sell or give as a gift any property of any kind to anybody without first discussing this with me. Some transfers can be considered fraudulent and may be avoided by the Trustee, meaning the transfer will be cancelled and the property returned to your bankruptcy estate as an asset to be sold by the Trustee, regardless to whom the property was transferred.

Contact a Consumer Bankruptcy Lawyer Today For a free initial consultation with Chapter 7 bankruptcy attorney Stephen J. Zayler, call 936-634-1020, or contact him online .

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P.O. Box 150473
Lufkin, TX 75915

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